VIXY ETF

VIXY is not a suitable long-term portfolio hedging tool due to negative roll effect in VIX futures, down -85% in 3 years. VIXY is only profitable in rare events, up 9.9% for the year despite a 55% gain after the August 5, 2024 VIX spike. Alternatives for portfolio hedging include buying Treasuries and market neutral funds like BTAL, which have shown better performances.

Market volatility surged last week due to escalating tensions in the Middle East. The fear index increased by 16% on Apr 12, reaching its highest point since late October, indicating growing concerns among investors.

The US economy shows soft business conditions, lingering inflation, and concerning household debt. The S&P 500 continues to reach all-time highs while the volatility index remains low. Owning VIXY in small amounts as a hedge to the S&P 500 and timing it properly can be beneficial.

The Federal Reserve's pivot towards a 'soft landing' and potential rate cuts in 2024 has boosted asset prices and hurt hedges like VIXY. Downside risks are now higher as investors have become too complacent, expecting 7 consecutive rate cuts beginning in March. Middle East tensions could reignite inflation worries, causing the Fed to hold rates higher for longer.

Volatility is a constant presence in the markets, causing concern when high and uncertainty when low. The VIX, a measure of market volatility, cannot be directly invested in and has a high tracking error. With the VIX approaching lows, it may be a good time to consider a short-term position in VIXY.

The escalating war between Israel and Hamas/Gaza could lead to a regional conflict involving powers like Iran and Syria. The ProShares VIX Short-Term Futures ETF can potentially hedge this risk and reduce portfolio drawdowns. While the VIXY ETF has historically suffered from contango decay, it can generate exceptional returns during periods of stress and be used as a short-term hedge.

The S&P 500 Index rallied after the US government suspended its $31.4 trillion debt ceiling, leading to market calm and a drop in the CBOE Volatility Index. The sustained rally in the S&P 500 is justified due to downward inflation trends and improving market sentiment. Investors may benefit from a long-biased VIX trading strategy to provide uncorrelated returns to equity-heavy portfolios.